1099 Independent Contractors Tax Strategies
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If you are an independent contractor working within the shared economy who wants to know more about tax benefits (specifically how to smartly write off business expenses) -- or if you are a founder who wants to know more about employees vs independent contractors this presentation is for you!
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1099 Independent Contractors Tax Strategies
- 1. 1099 Independent Contractors Tax Strategies #sharedeconomytaxes Derek Davis, CPA Shared Economy CPA The information contained in this website is meant only for guidance purposes and not as professional legal or tax advice. Further, it does not give personalized legal, tax, investment, or any business advice in general.
- 2. The information contained in this website is meant only for guidance purposes and not as professional legal or tax advice. Further, it does not give personalized legal, tax, investment, or any business advice in general. Hosted by: Shared Economy CPA
- 3. What is a 1099 Independent Contractor? • Overview: Cannot direct right or control – simply result • File Form SS-8, Determination of Worker Status The information contained in this website is meant only for guidance purposes and not as professional legal or tax advice. Further, it does not give personalized legal, tax, investment, or any business advice in general.
- 4. Common Law Rules (IRS) The information contained in this website is meant only for guidance purposes and not as professional legal or tax advice. Further, it does not give personalized legal, tax, investment, or any business advice in general. Behavioral - Right to control what the worker does and how they complete the job Financial - Business aspects of the worker’s job Type of Relationship - Employee benefits available
- 5. Employee vs Independent Contractor • Company benefits of Independent Contractor • Working arrangements • Paperwork • Benefits • Taxes • Companies maximizing on this The information contained in this website is meant only for guidance purposes and not as professional legal or tax advice. Further, it does not give personalized legal, tax, investment, or any business advice in general.
- 6. Independent Contractor Test The information contained in this website is meant only for guidance purposes and not as professional legal or tax advice. Further, it does not give personalized legal, tax, investment, or any business advice in general. Compliance and Instructing Training Required Integration of services into business operations Services rendered personally Hiring, supervising and paying assistants Continuing relationship Set hours of work Performing work on the employer’s premise Services performed in order or sequence set Oral or written reports Payment or written reports
- 7. Independent Contractor Test (cont’d) Payment of business and/or travel expenses Furnishing of tools and materials Significant investment Realization of profit or loss Working for more than one firm at a time Making services available to general public Right to discharge Right to terminate relationship without incurring liability The information contained in this website is meant only for guidance purposes and not as professional legal or tax advice. Further, it does not give personalized legal, tax, investment, or any business advice in general.
- 8. Risks of incorrect classification The information contained in this website is meant only for guidance purposes and not as professional legal or tax advice. Further, it does not give personalized legal, tax, investment, or any business advice in general. • Employees Classified as Independent Contractors • Independent Contractors Classified as Employees • Correcting Misclassification of Employment Reducing Employment Law Risks for Early-Stage Companies https://www.youtube.com/watch?v=QiJK_i8YtDY
- 9. Founder as Independent Contractor? The information contained in this website is meant only for guidance purposes and not as professional legal or tax advice. Further, it does not give personalized legal, tax, investment, or any business advice in general. • Fiduciary duty • Financial interest
- 10. Helping Independent Contractors Reap Tax Benefits The information contained in this website is meant only for guidance purposes and not as professional legal or tax advice. Further, it does not give personalized legal, tax, investment, or any business advice in general. • Why this makes good business sense • Hiring and retention strategy • How to help…
- 11. Calculating What Contractor Owes • Hypothetical Example: $35,000 in 1099 Taxable Income and Single • Self-Employment Tax is: • $35,000 X 92.35% X 15.3% = $4,945 • Personal Income Tax is: • $26,427 x Tax Bracket = $3,518 • Total Taxes Due: $8,463 • Total amount of earnings going to taxes 24% The information contained in this website is meant only for guidance purposes and not as professional legal or tax advice. Further, it does not give personalized legal, tax, investment, or any business advice in general.
- 12. KEEP TRACK OF YOUR BUSINESS EXPENSES! Scenario 2 Income $35,000 Business Expenses $25,000 Taxable Income $10,000 Self-Employment Tax $1,413 Personal Income Tax $ 318 Taxes You Owe $1,731 Scenario 1 Income $35,000 Business Expenses $ 0 Taxable Income $35,000 Self-Employment Tax $4,945 Personal Income Tax $3,518 Taxes You Owe $8,463 The information contained in this website is meant only for guidance purposes and not as professional legal or tax advice. Further, it does not give personalized legal, tax, investment, or any business advice in general.
- 13. What Are Business Expenses • Business Expenses “are expenses that are the cost of carrying on a trade or business, they is usually deductible if the business is operated to make a profit” • What Can I Deduct? • To be deductible, a business expense must be both ordinary and necessary. • Ordinary expense is one that is common and accepted in your industry. • A necessary expense is one that is helpful and appropriate for your trade or business The information contained in this website is meant only for guidance purposes and not as professional legal or tax advice. Further, it does not give personalized legal, tax, investment, or any business advice in general.
- 14. Examples of Business Expenses • Clothing necessary to perform your job duties • Food and Beverages when you’re on business meetings • Supplies: Laptops, Cell Phone Usage etc. • Car: Gas, Oil, Maintenance • Health Insurance • Home (if you work from home): Rent, Electric, Utilities, etc. • Other costs directly related to your business The information contained in this website is meant only for guidance purposes and not as professional legal or tax advice. Further, it does not give personalized legal, tax, investment, or any business advice in general.
- 15. App of Choice: Tabby The information contained in this website is meant only for guidance purposes and not as professional legal or tax advice. Further, it does not give personalized legal, tax, investment, or any business advice in general. • Free and easy to use sign-up • Download App • Link up your credit cards • Record your Business Expenses • Categorizes accounts based on Tax Form Schedule C • NO MORE RECEIPTS • NO MANUAL ENTRY • www.trytabby.com
- 16. Thank you! derek@SharedEconomyCPA.com www.SharedEconomyCPA.com 949-329-5087 @hderekdavis contact@earlygrowthfinancialservices.com www.earlygrowthfinancialservices.com 415-234-3437 @EarlyGrowthFS The information contained in this website is meant only for guidance purposes and not as professional legal or tax advice. Further, it does not give personalized legal, tax, investment, or any business advice in general.
Editor's Notes
- -In general, an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done. -You are not an independent contractor if you perform services that can be controlled by an employer (what will be done and how it will be done). -If an employer-employee relationship exists (regardless of what the relationship is called), you are not an independent contractor and your earnings are generally not subject to self-employment tax -In 2014, approximately 53 million people receive 1099 income and by 2020, estimates predict it will comprise 40% of our workforce -If still unsure thereafter, you can file Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding (PDF) can be filed with the IRS. The form may be filed by either the business or the worker. The IRS will review the facts and circumstances and officially determine the worker’s status. -Additionally, California has an additional 14 requirements to classify independent contractors as employees -IRS common law tests on the following slide
- Common Law Rules (Facts that provide evidence of the degree of Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job? Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.) Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business? -Additionally, California has an additional 14 requirements to classify independent contractors as employees -IRS has a list of 20 potential factors that will help determine if 1099 Independent Contractor -If you make more than $600 you will get 1099 MISC -You are responsible for self-employment taxes AND personal income tax (15.3% PLUS your tax Bracket i.e. 25%) -The 15.3% tax rate consists of 12.4% Social Security and 2.9% for Medicare taxes The various tax brackets are the following: 0 – 9,075--------------------------- 10% 9,076 – 36,900--------------------- 15% 36,901 – 89,350 ------------------- 25% 89,351 – 186,350------------------ 28% 186,351 – 405,100-----------------33% 405,101 – 406,750-----------------35% 406,751+ --------------------------39.6%
- If you have an employee, you must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. None of these are required if you hire a 1099 Independent Contractor 20 Factor Test of 1099 Independent Contractor on next Airbnb/Uber/Lyft/Task Rabbit: All companies that are able to capitalize on this
- If you have an employee, you must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. None of these are required if you hire a 1099 Independent Contractor 20 Factor Test of 1099 Independent Contractor -Twenty Factors of the "Common Law Test" All of the following factors must be considered in determining whether an employment relationship exists: -Compliance with instructions. Employees must comply with another person's instructions on when, where, and how the work is performed. In a true independent contractor relationship, the only control to which the contractor is subject is the result. -Training required. Independent contractors are not normally trained but rather are hired for their expertise in a field. -Integration of services into business operations. Employees' services are usually a vital part of the daily operation of an employer's operation. -Services rendered personally. Employees personally render the services, while contractors may delegate such work to others. -Hiring, supervising, and paying assistants. Usually individuals who perform all these functions are treated as independent contractors. -Continuing relationship. Employees are usually hired for an ongoing period, while a contractor's work ends when the job ends. -Set hours of work. Employees usually must adhere to a work schedule established by the employer. -Full-time required. Generally, employees work full-time for an employer, while independent contractors work when and for whom they choose. -Performing work on the employer's premise. Those working at the employer's site may be viewed as employees. -Services performed in order or sequence set. Persons told to perform work in a certain sequence generally are considered employees. -Oral or written reports. Employees are more likely to be required to submit regular reports to the employer. -Payment by hour, week, month. Typically, employees are paid on a regular basis, while independent contractors are compensated by the job or on a lump-sum or straight commission basis.
- If you have an employee, you must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. None of these are required if you hire a 1099 Independent Contractor 20 Factor Test of 1099 Independent Contractor -Payment of business and/or travel expenses. Employer payments of a person's work-related travel expenses generally indicates employee status. -Furnishing of tools and materials. Employees, not individual contractors, are generally provided with supplies. -Significant investment. Individuals who have a significant personal investment in the facilities they use for work are normally independent contractors. -Realization of profit or loss. Unlike employees, independent contractors realize a profit or loss based on their success in performing a service. -Working for more than one firm at a time. Individuals who perform services for a number of employers are usually independent contractors. -Making services available to general public. Individuals who regularly make their services available to the general public are usually treated as independent contractors. -Right to discharge. Employees can be fired, while independent contractors cannot be discharged if they fulfill contract specifications. -Right to terminate relationship without incurring liability. An employee can terminate his employment relationship with his employer at any time, whereas an independent contractor may be liable for breach of contract for leaving work unfinished.
- Really important to say that you're not a lawyer and that this is a complicated topic, but you'd be loathe to not at least mention the serious risks of incorrect classification. Employee Classified as Independent Contractor There are significant penalties for classifying a worker as an independent contractor when he or she meets the criteria for employee classification. Penalties include liability for employer taxes not paid (for example, FICA or unemployment insurance) and possible liability for employee withholding not remitted, as well as interest, fines, and criminal punishment for noncompliance with tax and immigration statutes. Independent Contractor Classified as Employee A worker may always be classified as an employee without penalties. Even if the worker meets the criteria for classification as an independent contractor, an employer may choose to compensate the worker as an employee. However, this increases the restrictions under which the employee works (for example wage and hour laws) and subjects the salary to a fringe benefits charge for Research Foundation benefits. Correcting Misclassification The following steps must be taken if an employee is incorrectly classified as an independent contractor: Retroactively classify the person as an employee. Transfer the independent contractor payments to salary and wages and charge the project, task, award for fringe benefits. The following documents provide additional guidance in other topic areas for engaging an Independent Contractor:
- Typically no good – as a founder you’ll need to pay the necessary taxes on behalf of yourself
- -Summarized from previous slides how to build this out -Figure out standard operations that have an ultimate end result and outsource that
- Here’s “Bob” with (35,000 – 2,473 – 6,100) = $26,427 Deducting ½ SE Tax and Standard Deduction Tax Bracket is roughly 13% 24% is 8,463/35,000
- -in the example above, by keeping track of your business expenses can play a crucial role -you can save $6,732 -paying approximately 5% of your earnings towards taxes instead of approximately 25%
- -Quoted from IRS Business Expenses – Publication 535, Section 1. Deducting Business Expenses -An Expense does not have to be indispensable to be considered necessary.
- Crazy Tax Deductions upheld by the IRS: Pet food Cat food was allowed as a tax deduction after the felines helped to clean up a junkyard by eliminating snakes and rats, which in turn made the place of business safer. As a result, the IRS lawyers allowed the cost of cat food to be deducted for that family. Body oil The tax court also ruled that a professional bodybuilder could deduct the costs of the body oil he used in competitions to make his muscles glisten, but deductions for buffalo meat and special vitamin supplements were denied. Breast augmentation A stripper named "Chesty Love" was able to deduct the cost of her breast augmentation surgery since the tax court judge ruled that the cost of her operation could be claimed as a business expense. Free beer One gas station owner was able to deduct the cost of beer as a business expense after he gave free beer instead of trading stamps for a promotion. A girlfriend One person who owned several rental properties was able to deduct his live-in girlfriend who managed the properties. "The Tax Court let him deduct $2,500 of the $9,000 he paid her. The disallowed portion was considered to be for nondeductible personal services," TurboTax says.